Growthology

Social Innovation

Last week President Obama hosted an event at the White House to highlight innovative programs in the nonprofit sector. The President acknowledged that in areas like education and health, the government can only do so much: "So if anyone out there is waiting for government to solve all their problems, they're going to be disappointed." 

The White House now has a $50 million Social Innovation fund and will look for programs that are as impressive and effective as those highlighted by President Obama. This includes Geoffrey Canada's Harlem Children's Zone, HopeLab, Bonnie CLAC, and Genesys Works. 

The "social" modifier is one that gets loosely tossed around all too frequently, but in many different areas, particular education and health, we are seeing the rise of hybrid organizational forms that seek to fill the lacunae between market and government. This is yet another instance of people seeking new ways to solve old problems, symbolizing the "pioneering spirits" the President praised that always push us forward. 

That's Why We Need More Entrepreneurs

Scott Shane recently joined the New York Times as a blogger for the site's new You're the Boss blog and in his most recent post used a series of charts to show that the United States is actually becoming less entrepreneurial than we would like to pretend.

Professor Shane, a professor of entrepreneurship, has been an outspoken skeptic of entrepreneurial capitalism, casting doubt on the extent and benefits of entrepreneurship. His latest line of research concerns genetics and entrepreneurship, identifying "the influence of genetic factors on the variation across people in opportunity recognition." This, Professor Shane purports to demonstrate, is heritable and independent of environment, as are occupational choices in general, such as teacher or manager or self-employment. (For a critique of opportunity recognition, see this recent paper: Download Creative Discovery Innovations June 2009.)

Notwithstanding potential sampling errors, the heritability of personality traits is a breeding ground for questionable claims. As the eminent Samuel Bowles has pointed out, "data from modern economies suggest that personality influences individual success, but the effects are quite modest." Moreover, "the correlations between parental and offspring measures of personality are strikingly low." The world periodically endures genetic determinism fads, and they rarely end well. 

Plus, if entrepreneurship is solely determined by genetic inheritance, why even have professors of entrepreneurship? 

In his latest post, however, Professor Shane is onto something: whether measured by the number of new employer firms started each year or the number of new establishments, the rate of entrepreneurship has fallen over the past two or three decades. Shane uses Census data that the Kauffman Foundation has helped fund, and I published charts on the falling establishment entry rate in a recent paper. And the share of Americans working in giant firms (those with more than 10,000 employees) has slowly but steadily risen in the past decade.

But there are a few points Shane fails to make. As one of his commenters notes, there has been a rebound in new firm and establishment creation since 2002. One of the datasets only runs through 2005 and when new Census data are released in August, we should know whether or not this rising establishment formation trend continued. With regard to new firm creation (nb, employer firms, not self-employed consultants or personal services), Shane's data run only up to 2007. But the Kauffman Index of Entrepreneurial Activity showed a slight uptick in new firm creation 2008. It will also be interesting to break all of this down by industry.

So what does this mean? We've actually seen a steady increase in the number of new firms started over the past few years. Shane's point is that while absolute numbers may increase, they fail to keep pace with population growth and so the rate, firm starts per capita, actually falls. That's right. But this only highlights the crucial need for more new firms, for more entrepreneurs. As we've noted before, using that same Census data, looking back over the past thirty years, if we had taken startups out of any given year, net job creation for the overall economy would have been negative in most years. No new firms, no new jobs. No one can escape, moreover, the great lesson of economic history that entrepreneurs are disproportionately responsible for radical innovations.

But the message is much broader than this: the real source of economic growth lurking in here is firm growth. This signals market success, generates jobs, and brings with it increasing returns to ideas. So even if the rate of entrepreneurship fluctuates on an annual or decennial basis, this doesn't mean that there aren't entrepreneurial firms growing to scale during that time. This, in fact, is precisely the pattern we would expect to see: a high rate of new firm creation followed by a period of falling entrepreneurship as firms fail, consolidate, and grow. This will (or should, provided barriers to entry are kept low) be followed by yet another period of high rates of entrepreneurial activity.

Links

Here is an essay just published in the wonderful journal innovations, one of the editors of which is the brilliant Phil Auerswald.

Download Creative Discovery Innovations June 2009

Also, a great post the other day by Jeff Cornwall at The Entrepreneurial Mind.

The Future Happened Yesterday and Today

Not to self-aggrandize, but this report, authored by me, was released the other day. I started with a question posed by our Kauffman colleague Keith Mays: how many companies on the Fortune 500 list were founded during a recession? It turns out that well over half of the companies on the 2009 list started during a recession or bear market. 

This, in and of itself, is remarkable. But it also turns out that the Fortune figure, when broken down by decade and when looked at in the context of recent Census papers that Kauffman has helped fund, fits neatly into a narrative of the American economy moving from the bureaucratic capitalism of Galbraith's New Industrial State to the entrepreneurial capitalism of the past two or three decades (and the entrepreneurial capitalism of a prior era). The composition of the companies on the Fortune list is rather dynamic (surprisingly, I think), but even more importantly, startups have been enormously important in terms of job creation. Without startups, we would have had only a handful of years in which overall net job creation in the economy was positive.

In fact, startups are much less sensitive to recessions than the overall economy, which seems to run counter to conventional wisdom. In any case, the research paper tries to tell a story: we would appreciate any and all feedback.

Kedrosky: Cut Venture Capital in Half

Paul K, a colleague at Kauffman and relentless blogger, published a brilliant short paper on the venture industry today -- RIGHT-SIZING THE U.S. VENTURE CAPITAL INDUSTRY. It's must reading for the charts alone. A snippet:

External capital is sometimes required by some private companies in their early stages, and it is good that there is a class of professional investors with enough financial resources to provide that assistance when it is needed. However, venture capital and entrepreneurship are separate phenomena, even among growth companies, and conflating the two, let alone implying that the former causes the latter, is untrue and unhelpful.

My frustration with the VC mytique is the persistent belief that it is the foundation of entrepreneurship (hey, that's a good tag line ...). Most of the folks I know in this world acknowledge that the trend is to invest in later stage companies. I hear the word profitable a lot. A profitable startup is not a startup. You can have profitable companies or startup companies. Not both. 

Paul's paper focuses much more on the hard numbers at stake in contrast with the low returns. I agree, but still wonder if Sarbox isn't killing the startup scene (including VCs).

The Empirical Wrath of Harold Bradley

Pity the wealthy patrons of the National Venture Capital Association: they have called upon themselves the wrath of our very own Harold Bradley, who has now concluded his three-part crusade for empirical truth, economic justice, and the non-venture-backed way of entrepreneurial success.

Hold Onto Your Hats . . .

The National Venture Capital Association, which often makes venture capitalists sound like economic saviors, has recently put out a "four-pillar" plan about how to save capital markets and the future of economic growth. What to do? I won't spoil it for you, but it rhymes with "schmenture schmapital."

If you want the real story of how we got here, the ever-perspicacious and tasteful Harold Bradley pulls the curtain back on the Wizard.

Entrepreneurs Stay Strong

A new Kauffman Foundation study finds that entrepreneurial activity increased in 2008. The press release and the study highlight the variable trends beneath the aggregate figures, but here's what jumped out at me: immigrants continued to found new businesses at higher rates than natives.

Most of the noise in the econo-blogosphere around immigration has concerned H1B visas and the turning away of high-skilled immigrants. But as I've noted before, we can't ignore the lower-profile immigrant entrepreneurs.

As an aside, it will be interesting to note the detailed NAICS breakdown of new firms once all the data becomes available. Our study has the general industry categories (e.g., construction, services) but not the more detailed information.

The Next Economic Wave

A recent Time magazine article pointed out that many people see the recession as a good opportunity to start a new company: "At no other time in recent history has it been easier or cheaper to start a new kind of company. Possibly a very profitable company. Let's call these start-ups LILOs, for 'a little in, a lot out.' These are Web-based businesses that cost almost nothing to get off the groundyet can turn into great moneymakers."

Indisputably, the Internent has fundamentally changed the dynamics of not only starting new companies but also starting up in a recession. If it's cheaper and easier now with this technology, perhaps Web-based firms offer one promising route out of the recession and onto a long-term growth trajectory.

The Internet, obviously, is relatively new. But the underlying story--about startups and recessions and economic growth--is an old one. The very nature of technological change and economic growth is the rise and fall of successive waves of entrepreneurs. The early New England textile manufacturers became an elite whose names (Cabot, Lowell) still today signify distinguished pedigree. Part of the reason Los Angeles became the center of the film industry was that many of the entrepreneurs were driven out of New York by the established (such as they were) companies and individuals. We can replay the same story with FM radio, software, search engines, etc. 

A generation of entrepreneurs becomes the next generation's elite, the position of whom is then challenged by newer entrepreneurs. Henri Pirenne knew this; Joseph Schumpeter and his intellectual cousins, the Austrian economists and German historicists, knew this. We are apparently rediscovering it today.

Research we have been working on the Kauffman Foundation, soon to be released, will confirm this broad theme. Recessions don't seem to matter all that much to entrepreneurs--they act as their own economic stimulus package. The most pertinent policy question, then, concerns what actions we should take or not take such that we don't squash the next emergent economic wave.

Hacker Space

If you think the only way to stimulate the economy flows from a benevolent social plan to restructure the economy, don't miss this commentary by David Brooks. Everyone from WaPo to Leno is buzzing about the new car dealership at 1600 Pennsylvania Avenue.

But for those who think innovation is more of a grass-roots, garage, dorm room, perspiration and inspiration kind of thing, you will enjoy this heartwarmingly geeky blog post at WIRED about hacker spaces. Something tells me that Ewing Kauffman, the young enlisted Navy prodigy, would have been thrilled to visit one of these places.

Carl Schramm on Fox Business News on FASTTRAC Launchpad

Carl Schramm, Kauffman's president, discussed FASTTRAC Launchpad yesterday on Fox Business News. Here's the link, courtesy of Real Clear Politics. The runtime is about 7 minutes. 

iPhone Entrep Horde

Call it Steve Jobs' revenge. In what might be called the original "Clone War" of the 1990s, the superior Mac OS and hardware were routed by the Wintel clones -- IBM clones really, including Dells, Gateways, and something called a Compaq. Apple had a fetish for perfection, and old Steve just could not abide letting lesser mortals have a license to make compatible machines. Nor could the great Apple sully its OS by making a version that would run on a clone. Worse yet, Apple wanted to make almost all its own software and snubbed independent software developers.

Maybe that's an unfair charge, you say? Well, I was one, so I remember it pretty vividly. Our company, NeocorTech (a name that liternally nobody got for the half decade we were in business), made Japanese translation software that ran on non-Japanese Windows machines. And how many calls a week did we get asking if we made a Mac version? At least one. And of course, the answer was no. Why? Because Apple made it very hard for us.

So Microsoft had a horde of software coders to match the horde of Intel's clone machines, and we overwhelmed the Macintosh. For a long, long time, my partners and I were part of the crowd of Apple haters who mocked them like Americans mock the French. They were hilarious snobs - oozing stylish class and business ignorance.

And then Steve came back to Apple. And he got it. And when he launched the second coming of computer technology in the iPod/iPhone, he deployed the strategy of the horde of third party developers. And lo, they built a plentiful garden of awesome capitalist creativity that nobody, not even the French, can deny.

Back in the 90s, you still needed a company to deploy your software. But Apple's AppStore took things to an entirely new level. Raw Entreps are making awesome stuff and living the American dream faster and more fully than ever before. Check out this story from WIRED:

Apple's iPhone application store is as crowded as a Beyonce concert, with more than 20,000 apps available. But one independent developer still managed to rake in $600,000 in a single month with a single iPhone game.

Ethan Nicholas, developer of a tank artillery game called iShoot, told Wired.com he quit his job the day his app rose to No. 1 in the App Store, earning him $37,000 in a single day.

"I'm not going to be a millionaire in the next month, but I'd be shocked if it didn't happen at the end of the year," he said in a phone interview. "If it weren't for taxes I would be a millionaire right now."

Until recently, there has been no realistic way for individual programmers to make serious money on their own. Most of the software market is dominated by big companies, and the traditional distribution method for independent developers -- shareware -- isn't conducive to striking it rich. By contrast, Apple's iTunes App Store provides a platform for marketing, selling and distributing software; all a developer needs to provide is a good idea and some working code.

So the question is: What recession?

Book of the Week

The Knack, by Norm Brodsky and Bo Burlingham.

After years of building companies and mentoring would-be entrepreneurs, Brodsky has finally collected his thoughts in one volume. And it is fantastic. As Bob has noted, you can now walk into the bookstore, sweep all the alchemy cookbooks how-to entrepreneurship books off the shelf, and replace them with The Knack. 

Emergent Innovation: interview with Nathan Myhrvold

This is what makes Joel Achenbach special -- a fantastic interview with Microsoft's genius behind the throne, Nathan Myhrvold, written for the Princeton Alumni magazine and titled:

Inventing the future

The very cool world of Nathan Myhrvold *83

All of which raises a rather profound question: Were teeth inevitable? And what about the innovations in our own world — are they the result of carefully orchestrated projects, schemes, and hard work, or do they tend to bubble up from a million accidents and casual inspirations?  

“Broadly, overall, the way society works is emergent, and it is built on progress — it generally runs downhill toward something better,” Myhrvold says as we get deep into the philosophical weeds on all this stuff. The world is a better place now than it was 500 years ago, he declares. Driving that improvement is, he believes, technology. He’s an unabashed technophile. And he seems to have a strong libertarian streak.

“Creating new technology through invention is the single biggest value driver that our society has,” he says. “Humans grabbed the tiger by the tail when we invented agriculture, and it was one of the best and one of the worst things we ever did.”

Barbers @ Work

Surfing around the Inc.com blogs, I found this gem by Clint Greenleaf.  I could have written it myself (up until the part where he actually did something about the problem).  Maybe that's the difference between Marines and Zoomies. 

So, I figured out a better plan. During a haircut a few years ago, I asked my barber in Austin if she ever did house calls. She was open to the idea, but said that there are some regulations against hair cutting outside of barbershops. Seriously, no matter what your political leanings are, you have to agree that if the government is regulating who and where you can get your hair cut, regulation has gone amok. Despite the risk, she agreed to come to my office two weeks later to cut my hair. (Rest assured that my barber gave me permission to share this story.)

It was seamless. She came and set up in the men's room, brought all her own supplies, and cleaned up after she was done. I didn't need to stop working until she was ready for me, and as soon as I was done, I was back at my desk. I add a few bucks to her tip to cover travel costs and can schedule it when I have time.

I save at least an hour every few weeks between driving time and waiting time whenever I get my hair cut. Some of my employees, who would otherwise have to burn a lunch or spend time on the weekend, now also get their hair cut at the office.

Awesome. Carl, Bob, Dane ... EJ! ... wouldn't you love this?  I would get my hair cut every Tuesday if it was an option. As it is, I get my hair cut every other month. I wait until the Grandpa Munster look sets in. Then I wait some more until I can find some time. Then I drive around town, scanning which shop has the shortest line. It's a perverse competition to seek the worst haircut of the year pretty much every time I'm out. We have to break the cycle.

Henninger's Warning

The greatest danger in the current economic crisis is that the United States will lose its historic appetite for risk. The mood now is that risk-taking got us into this mess. Risk, though, is the quintessential American trait that built the nation -- from the Battle of Bunker Hill to the rise of the microchip. If we let risk give way to a new ethos of commercial reserve and regulatory restriction, the upward arc of the U.S. ascendancy will flatten. Maybe it already has.

...

This is the moment for Americans to rediscover the "frontier thesis" of Frederick Jackson Turner. In a seminal paper delivered in 1893 to the American Historical Association, "The Significance of the Frontier in American History," Turner argued that the U.S. found its identity as it pushed away from the Eastern seaboard and crossed a series of frontier "fall lines": the Allegheny Mountains, the Mississippi, the Missouri, the plains, the Rocky Mountains and California.

...

The current crisis is the result of a world gone madly long on real estate. Daniel Boone, the famed American frontiersman, went belly-up speculating on Kentucky land. He moved on in 1788 and paid his debts. So should we, without losing sight of the American frontier, where we discovered the rewards of risk.

So says WSJ's columnist Daniel Henninger. (I've never read one of Henninger's columns without being happy that I did, and going forward a little wiser).

Transformational Ideas -

Some great advice here in an article (by Greg Huang) about Nick Hanauer, the first non-family investor in Amazon.com. It's a terrific article, but this line is my favorite:

So entrepreneurship is a dangerous field, he said. “The difference between being an idiot and being a genius is very, very thin.”

Exactly.  And I try to stay right on that line! OK, now back to the wisdom from Hanauer:

—If you have a breakthrough idea, you don’t need a breakthrough way to get it to the market. “If you have transformational value, people will beat down your door…Focus on the product. If the product is good enough, marketing will take care of itself. If the product sucks, no amount of marketing will get you over the hump.”

—”I’m not a technologist. From my point of view, technology is simply a thing that allows you to bring transformational things to customers…People get excited about a particular technology, and they forget the question: what does this do for people? It’s about what the customer gets compared to the alternatives.”

—”As an entrepreneur, I’ve never been concerned about competition. If you’re early, run like hell. It’s all about execution at the end of the day. It’s about having a great idea, executing like hell, and delivering value to customers.”

Google: the best marketing is excellence

This NYT article by David Carr contains a powerful lesson for young businesses: how Google's best marketing is its non-marketing, just letting the excellence of its products do the outreach.

“The most powerful form of advertising is to be exceptional,” said Ranjit Mathoda, an investor and technologist who blogs at Mathoda.com. “Google has created an ecosystem that perpetuates itself by being useful.”

Take video chat. Many other companies would take that kind of quantum leap and shout it from the rooftops, but Google just did a smallish blog post about the new feature and left it at that.

“We do have a philosophy that our products should speak for themselves. We tend not to make a lot of noise,” said Jeff Huber, senior vice president for engineering at Google.

There is a sub-conversation about Iternet privacy, and it matters, but new startups should not miss this lesson. Happy customers are your best sales force. That goes for cars, cameras, and coffee.

Is Iron Man the most inspirational "Engineer" movie?

Loyal Reader Cheevers asks in the previous boodle Mac discussion:

Also I'd recommend the Iron Man movie sound track @ work. Coding and listening to it right now :-).  Do you think more kids want to be engineers after seeing that movie?"

My answer is/was:

I had not thought about the engineering angle on Iron Man, but totally agree. I always thought Tony Stark was cool from reading the comics, so didn't see how impressive the movie must be to kids unfamiliar with the character. Too bad Lucas never had a real gear-head as a character (I guess Anakin was in Episode 1 - he made C-3PO and his race pod thing, but it didn't show much in-depth. Or did it?)

So this raises an interesting question. Was Iron Man more inspirational to potential engineers than Star Wars? Is there a more inspirational movie I'm not thinking of? Personally, I'm trying to think what inspired me to want to get my hands dirty with science and tech.  War Games, probably. Or 2001/2010. Maybe someone out there has already thought about this.

A Google search reveals somebody is named Ron Graham. Look at this list!

This merits a survey.  I should probably do two surveys: one to assess what we (growthology readers) rate as the most inspiration "engineering" movie and a second for the best "entrepreneur" movie. Offhand, here are the lists I'll use - subject to recommendations from the comment boodle here.

BEST ENGINEER MOVIES

• Iron Man
• 2001/2010
• Star Wars
• War Games
• Star Trek
• Apollo 13
• The Right Stuff
• October Sky

BEST ENTREPRENEUR MOVIES (blogged elsewhere, but I dislike most of those choices)

• The Aviator
• Tucker
• Citizen Kane
• Ghostbusters
• Pirates of Silicon Valley (?)

Innovation in Hawaii

Hawaii isn't the first place that springs to mind when one thinks about entrepreneurship, but it has more surprises than I expected. A half-dizen meetings were arranged by Dr. Bee-Leng Chua at Hawaii Pacific University, who has been the lead organizer for Global Entrepreneurship Week in Hawaii. No time for snorkeling this trip!

Russel Cheng gave me a tour of Oceanit, a tech firm located in downtown Honolulu that spins off baby tech firms once or twice a year from its R&D business model. The company's workforce is 25 percent STEM Ph.D.s, and they have studiously avoided operational models to focus on creative applications of different scanning and surveillance technology. Beds that can monitor a patient's heartbeat and respiration unintrusively (or a baby's). Ants that can be dropped from the air and detect dangerous substances. X-ray vision. Heads up, young techies, Oceanit would love to see your job application.

Dr. Rob Yonover is an independent inventor who is a little crazy and a lot brilliant. He's been cranky out one weird invention after another for years, all in the space of survival gear. He's caught the attention of the military, and in the process sold new gear to save people's lives in rescue situations, even a portable desalination device. 

The most heartening visit was with three entrepreneurs at Yuka Nagashima's incubator at the University of Hawaii (the High technology Development Corporation). The first presenter, Dr. Adelheid Kuehnle is a tenured biotech scientist who is launching an altenrative energy company that you can only dream about - using algae to grow jet fuel.

An incubator is a tough institution to model properly, but Yuka is a former entrep and is building a role model. I learned a lot about the unique challenges facing Hawaii. Consider how the Internet opened up possibilities for the knowledge economy to blossom here by linking the islands to researchers on the mainland. Consider the attractiveness for a tech community in the physical environment. Yet Honolulu faces the same funding challenge as the flyover Midwest -- VCs eventually pull local protfolio companies back into their orbits in San Jose or Austin. The "Broadway Joe" problem.  So Hawaii is struggling to build a gravity well of tech talent.

Talking to David Leung, President (and I think founder) of Ikayzo, I learned that his very savvy firm not only started here, but was started by engineers who wanted to move here specifically to start their technology company. Ikayzo developed a private-label social network app and is launching a public Beta in a few weeks based on the technology called OOI. If you can get guys like David Leung, you are doing something right with your development strategy.